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Cover Story
 
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A TUCK-IIPM THINK TANK-B&E JOINT STUDIES
R&D and Technology – do they pay off?
Companies all over the world spend billions of dollars on R&D. A few breakthrough products do come to market from such initiatives, but from a return on investment perspective, does R&D really pay off? The answer unfortunately is a definite negative
Issue Date - 30/05/2012
 
The R&D and technology conundrum!
Critically, how valuable do the world’s greatest organisations consider investments in R&D and technology? How well do these investments improve profits, sales etc...?

Let’s first take the ‘technology’ question.

When the famed Jim Collins wrote a few years back in his best seller, Good To Great, that “none of the Good-To-Great [world class] executives put technology as one of their top 5 drivers,” not many believed that that would be the way it would be in the future. Three years back, when we researched the outstanding NYSE CEO Report 2008, it stunningly corroborated Jim’s findings by showing that only 5% of CEOs now thought that new technology would be “the most important internal factor affecting profitability...” 67% of CEOs believed that “the ROIs from technology investments have failed to meet expectations till date!”

The factor considered most important by CEOs for revenue growth was a ‘management team’, not technology. Though there are many believers in R&D, the NYSE CEO Report 2010 convinces us not to befooled with the promises of the dollars wasted in R&D. It states, “As was the case [previously], operational efficiency and management stand out as the internal factors expected to have more impact on profitability. CEOs have downgraded the importance of new technology and products...” 70% of CEOs now say they would not increase their investments in technology.

Is technology adoption important for a company to perform excellently? Let’s start with PwC’s Annual Global CEO Survey 2007, which stated that global CEOs place “technological disruptions” at a lowly rank of seven in the list of most important concerns. The report further stated that only 20% of CEOs are ‘extremely concerned’ about “technological disruptions.” Even in PwC’s 2004 Global CEO Survey, top honchos had firmly believed that “Technology” was only a lowly 7th in their priority of biggest challenges. The number one of course being – People!

Yang Yuanqing, Chairman and CEO, Lenovo, quotes in the 2007 report, “The most critical factors that determine whether you win or lose are the way you do business, the deployment of your resources, the allocation of functions and your operational workflow....”

Dr. Peter M. DeMarzo, Dr. Ron Kaniel and Dr. Ilan Kremer (Stanford Graduate School of Business; and the Fuqua School of Business, Duke University) in their formidable report (...Technology Bubbles) doubly vindicate that finding with conviction that “the introduction of a new risky technology results in over investment, and in risk-taking behaviour which seems to deviate from a rational outcome.”

A lucid and provocative speaker on business and technology, Nicholas G. Carr, in an extremely insightful HBR article titled, ‘IT Doesn’t Matter’, proves through extensive research that “as Information Technology’s power and ubiquity have grown, its strategic importance has diminished. Technology’s potential for differentiating one company from the pack – its strategic potential – inexorably diminishes.” While experts and media houses from around the world called the work “A bombshell” (Forbes), “Provocative” (NYT), “Firestorm!” (BusinessWeek), “Accurate description of the technological world...” (CNN Money), “...and “of today’s tech landscape” (WSJ), Steve Ballmer, CEO of tech-giant Microsoft, predictably called the article a “hogwash!”

 
A letter from John Brown (former Chief Scientist, Xerox) and John Hagel III to HBR had this warning, “Businesses have overestimated the strategic value of IT. They have significantly overspent on technology in the quest for business value. IT-driven initiatives rarely produce expected returns...”

We found almost all global research pointing towards the same direction. The IBM Global CEO Study shows how in the electronics industry, the “technology factor” is not the most important external force shaping innovation (‘Market Factors’ is, as per 56% of respondents). In their report titled Economic and Technical Drivers of Technology (March 2006), Dr. P. Yin (HBS) & Dr. Timothy F. Bresnahan (Stanford) dramatically prove that even in technology industries, “distribution played a larger role than did technical progress in determining the market outcomes.”

The inimitable Economist Intelligence Unit 2007 report states, “As amazing as engagement technology can be, experts agree that it is generally better to focus on business goals rather than the technology.” Charles Jennings of Reuters says in the report, “I think there have been lots of mistakes over the last ten years, expensive mistakes, because they’ve been technology-led.”

Thus, it’s quite clear that the world’s greatest CEOs and companies do not over-emphasise on or overinvest in technology, which in any way can only be an enable, never a differentiator.

This brings us to our second issue: Research & Development. How much should a CEO focus on R&D? Should R&D be the most critical driver of business growth?

Think of the names of the top ten R&D spenders in the world – Toyota, Pfizer, Ford, Johnson & Johnson, Daimler Chrysler, GM, Microsoft, GlaxoSmithkline, Siemens and IBM, all excellently performing companies, constituting a mind numbing 15% plus of global R&D spend – this seems to be the final proof that it’s R&D and not any anything else that is most important for companies. Well, not so fast, we say.

The joint HBS and Southwestern University 2006 ‘Industry R&D Survey’ shows how the total number of R&D spenders in the US, while rising since 1974 and peaking in 1993, have almost regularly gone down year after year since then till the turn of the century. Prof. Arthur A. Daemmrich of Harvard Business School in a column which he contributed to the February 2011 issue of Business & Economy magazine, on R&D investments (titled, ‘Vicious and Virtuous Cycles in Research & Development!’) wrote about the declining investments in R&D in the chemical industry and the after-effects of such strategies. He stated, “To bring a technology from invention to market requires time, effort and increasing R&D investment. Yet in recent years, funding for R&D in the chemical industry has entered a precarious position, as companies underwent significant internal changes or merged with former competitors. Reports on industrial R&D from the past three decades track a decline in expenditures: in 1980, the top fifteen chemical firms expanded their R&D spending by 13%; in 1990, R&D spending grew by 6%; in 2003, forecasters predicted a 1% decline!”

          

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